Esports has a money problem. Will publishers be part of the solution?

As most esports organizations continue to operate in the red, the sustainability of the industry is called into question. That’s where game developers may have a part to play.

There are two main winners in esports: players and publishers.

Publishers own the games, so they get to play God. For the esports industry, this has been a blessing and a curse: a publisher is the reason a given esport exists and the main barrier to its profitability.

Publishers are bottlenecks for teams’ earning potential. It is within the power of publishers to transform the fate of teams and solve the finicky puzzle of monetizing esports. Traditional sports teams have healthy media rights deals to lean on. Football, basketball, cricket, tennis: the task of monetizing these was far simpler than for esports titles. A product, let’s say Wimbledon, was taken to a broadcaster, in Wimbledon’s case the BBC, which paid for the exclusive rights to show it on television. Most esports competitions have signed no such agreement because they live on Twitch or YouTube or both, which are free. They live there because the fans live there — not the other way around. As such, a big chunk of the revenue that is available in traditional sports is not there in esports.

Esports fans are used to watching their favorite competitions at no cost. Their habits are entrenched; if asked to pay for Worlds this week, there would be a sharp drop in engagement and interest. Esports Twitter would erupt.

But esports, believe it or not, has one advantage over traditional sports in terms of revenue-generating potential. Publishers could click their fingers and make teams rich. This would be immediate and simple. Teams could continue spending exorbitantly to promote a publisher’s game for as long as the publisher wanted, because they would no longer have to bend over backward to diversify. To achieve this, publishers could share revenue for things like in-game purchases related to esports. They have rarely done so.

“That was a major problem in League of Legends,” Devin Nash, former CEO of Counter Logic Gaming (CLG) and co-founder of NOVO, told Dexerto. “For teams, you could put one skin [in-game cosmetic item] in the game and you would have funded a team for like two years. … The revenue verticals that are available to teams through actual in-game monetization are non-existent. As a whole, publishers are still very oppressive entities in esports.”

Riot Games made more than $32 million from its Valorant Champions skins bundle, which was released alongside the Valorant competition of the same name. Half of this was shared with competing teams. Each team made around $1 million. To illustrate how vital this income is for teams, Danish esports org Astralis, a leading org globally, lost $850,000 in the first half of 2022. If Astralis had a team competing at Valorant Champions, revenue-sharing for one set of skins would have negated the org’s financial losses for half a year and still left them with $150,000 to spare.

Such a revenue-sharing model is the easiest way publishers can help teams be more sustainable today, and the Valorant Champions example is promising. Riot Games appears to be taking this and other steps toward making partner teams more economically viable, such as an annual stipend of at least $600,000 for the VCT partner leagues, but details around future revenue-sharing intentions are limited. Still, Riot promises that more revenue sharing is planned, and in Valorant there isn’t a $10 million-plus fee required for teams to take part. If we see more Valorant Champions-level commitment, this could set a healthy precedent and transform the esports industry.

But Valorant is one esport. “While Valorant is going in the right direction, the vast majority of esports, at a publisher level, is still messed up,” Nash said. “CDL — messed up. Overwatch League — messed up, beyond all recognition. It’s so broken. So we’re not in a place yet where there’s this Age of Enlightenment where publishers are [doing enough to help teams financially]. They’re still taking.”

The problem has historically been that publishers rarely make things easy for teams. In 2020, Activision Blizzard mandated Overwatch League (OWL) teams, after already spending $20 million-plus to bag a spot in the league, foot the bill of renting out venues like the Hammerstein Ballroom in New York to be used for competitive fixtures, as reported by WIRED. Team owners were worried these venues would cost hundreds of thousands of dollars per day, and that ticket and merchandise sales wouldn’t be enough to recoup costs. “There was no way to make money off that,” one anonymous team owner told WIRED.

Esports teams are not multi-billion-dollar sports franchises. This absurd downward pressure must alleviate if esports is to thrive, particularly as we face a macroeconomic downturn.

“StarCraft would have been a completely successful, amazing esport,” Nash said, “but Blizzard insisted on controlling the IP totally. Riot makes the same mistake with all their games. So I agree Valorant is a better model than the LCS objectively — it doesn’t require tens of millions of dollars in franchise fees, and they obviously learned lessons in the LCS — but they are still not allowing any kind of community tournaments or any kind of IP. As long as you have that, you inherently limit the growth of the sport.”

Some publishers are worse at esports than others. Activision Blizzard, particularly the Activision part, has a prickly reputation in gaming and esports these days. The company gutted Heroes of the Storm’s esports scene with a single blog post, upending the lives of hundreds of players, casters, and behind-the-scenes staff without a word of warning.

The Overwatch League (OWL), an Activision Blizzard property, has been a massive failure relative to the expectations set by notorious CEO Bobby Kotick at BlizzCon 2016. Kotick pitched his rich friends on esports, particularly the Overwatch League, as the next big thing. It would sell out stadiums on a weekly basis, he said, and teams would earn a killing from concessions and broadcasting deals. Optimists called it ambitious. Others called it stupid. On most metrics — viewership over time, the excitement of fans, financial returns for teams and investors — the OWL has come up short.

The Call of Duty League (CDL) is similar to the OWL: overpriced franchise spots, sky-high operating costs for teams, and enough hubris from Activision Blizzard to overshoot the league’s potential. Another Activision esports property botched. Jacob Wolf reported that Activision Blizzard is owed about $400 million in franchise payments by teams in the OWL and CDL. The leagues in their current state are unworkable.

Besides the cost of franchise spots, the cash burn rate is a major problem for esports teams, with ludicrous player salaries the greatest contributor.

Don’t hate the player

While they surely cannot be blamed for it, players are paid far beyond what they return for teams in almost all major esports titles.

Dot Esports reported last year that League of Legends player Perkz was earning $2 million per year on a three-year contract as a Cloud9 player. In 2020, Jensen agreed to a three-year, $4.2m deal with Team Liquid. Based on financial returns, players are just not worth that kind of money.

“As an industry, we wanted to be traditional sports so bad,” Nash said. “We wanted to put up the LeBron James salaries, the Shaq salaries — we’re just not there. The reason why those salaries make sense in traditional sports is that there’s backing from Fortune 500 companies that will buy advertising space in those areas. We just don’t have that ecosystem developed in esports. … It’s a business. It’s got to make sense, and it doesn’t make sense right now.”

Comparing esports to the NHL, Harris Peskin, Executive Director of the Esports Bar Association, said on Jacob Wolf’s Visionaries podcast: “What you have [in the NHL] is a maximum of roughly 50% of the hockey-related revenue to be spent on players. But when you have teams [in esports] spending in excess of their 1:1 ratio [on player salaries] in all of the revenue that they’re generating, obviously it’s not successful.”

“I think the classic example is CS:GO, where the ecosystem has never made any sense to me because player salaries are so out of whack with the underlying earning potential,” said Dave Harris, founder of Guinevere Capital, which invests in Excel Esports and League of Legends Circuit Oceania (LCO), among others. “You see it in traditional sports, this problem of feast or famine — everyone is going the high-risk strategy. ‘If we get a good squad and finish top three and make it to Worlds or make it to a Major, then it pays off.’ But the problem is it becomes a zero-sum game very quickly as the value is transferred to the player, which de-risks it for them, and increases the risk to the org.”

In nearly every major esport, player salaries are nonsensical. Nash doesn’t believe a salary cap will be introduced in any title because it would cause too much of a PR headache for publishers, and it would be too difficult to get team owners to work together.

So what is the fate of unsustainable player salaries?

Belts are about to be tightened on a global scale, far beyond esports. Before, lossmakers were tolerated as a cost of doing business. During a recession, investors deal less with ‘growth’ stocks — potentially high-growth companies — and more with steady companies with strong balance sheets. If there’s one thing esports teams tend not to have, it’s a strong balance sheet. Esports as we know it has never been through a recession. As a result, player salaries will correct.

“What realistically is going to happen is the [venture capitalist team investors] and LPs [limited partners] are going to say, ‘We don’t have money to give you,’ or, ‘We do but we don’t want to give it to you — here is your budget for the year, figure it out,’” former CLG owner Nash said. “Then when these negotiation periods happen in October, [teams are] going to have a serious conversation with their players and say, ‘Hey, we need to pay you one-tenth of what you were getting paid before.’

“Then the player goes, ‘No thanks, I’m going to another team,’ and what previously would have happened is that there would have been a bidding war, but [bidding teams] are going to say, ‘Our VCs and LPs say the same thing,’ and this is just going to drive down prices and the ecosystem will just naturally correct, because the money won’t be there.”

Ryan Morrison, CEO of Evolved Talent Agency, told Dexerto that while initial salary offers were lower than before and perhaps structured differently through bonus clauses and so on, in most titles, salaries are staying the same or increasing.

Morrison said: “There are three types of owners right now. There are the guys who really believed in [esports] who have now completely checked out but are stuck with the franchise they’ve bought; there are the VCs who don’t care, who just want to look at a spreadsheet … and make it as profitable as possible; and there are the ones who still want to win, the ones who want to bring the trophy home. And to do that, they get in their heads which players they need, and if two owners like that get into a bidding war on a player, that’s all it takes to change the entire salary scheme. And we’ve never gone an off-season without seeing that happen.

“Even though opening offers are much lower, even though players are desperate to play so they’re taking minimum salaries, if they wait long enough and if they have good representation, typically the salaries are still where they were — or higher.”

Another executive at a leading esports talent agency told Dexerto that player salaries remain stable across major titles. And despite Morrison’s observation about player salaries still rising, as investors wrap their fists in preparation for a recession, money simply may not be available to esports teams. Valorant may be the exceptional title given the healthy-looking ecosystem Riot has set up for 2023, but for most others, the economics surely must correct at some stage.

Guinevere’s Harris said that team owners should call the bluffs of salary demands more often. Soon they may not have a choice.

Why should sponsors stick around?

To make matters worse, sponsors, whom esports teams rely on immensely, are also losing.

“Here’s what happens — this is the playbook I’ve seen a million times, right? The sponsor comes in, puts like $500,000 behind an esports team for a year, looks at the results. Nothing happens,” Nash said.

He illustrated the point: “I know for a fact there was one esports team — a tier-one, global team — that was sponsored by a computer company to sell PCs. Guess how many they sold? Twenty-eight. [A superstar-level gaming influencer] for the same company, in the same amount of time, sold 1400.”

Nash hinted that when organizations were making compelling team-based content — for example, the TSM and Team Liquid of old — the prospect of future sales improved because fans felt more connected to the brand. But right now, it makes more sense for sponsors to bet their money elsewhere.

“The project managers and marketing people at [sponsoring] companies are realizing, ‘If I activate a single influencer to advertise my products, my engagement is going to be better; [customers are] going to be more interested,’” Nash said. “That’s where the money is going. And secondly, a lot of it is actually channeling over to digital spend — for example, running AdWords — because the CPMs are just better.”

So sponsorship revenue, the one saving grace for esports teams and upon which most teams rely enormously, may be reduced. Nash said for some teams this is already happening. “For endemic sponsors, I’d say what that sponsorship is worth [for a year] is about $200,000 to $400,000. That’s around the amount it’s actually worth in terms of ROI, probably closer to $200,000. But what the teams are asking for is like upwards of a million bucks. … Lots of teams are taking endemic equipment sponsorships for close to free, like $20,000 to $50,000 a year, because they can’t fill the spots. They can’t sell them.”

Is esports doomed?

This piece is optimism disguised as doomerism. As an industry, instead of being swept up by premature hype, we should acknowledge the challenges we face and work to overcome them. When player salaries inevitably correct, we as an industry should be OK with it, and encourage the Twitter dogs who bark loudly to accept reality. Until teams start generating more revenue, very few players should be on million-dollar-plus salaries.

If publishers believe esports is a net positive for their games overall, they should do more to protect teams. Perhaps — hopefully, for the industry’s sake — Riot will set the tone with Valorant esports in 2023; it has been a good start. If teams, which are burning ungodly amounts of cash, run into problems and cannot offer players the money they’re happy with, those players might turn to full-time content creation. This would be catastrophic for esports, and if Riot, to use an example, believes League of Legends esports drives hype for its game, a sudden shock to the esports ecosystem might impact the bottom line.

As Doublelift recently said: fewer top-tier players might equal fewer fans of the esport. This may ultimately hurt the pockets of publishers. Hopefully, this prospect will be enough to encourage publishers to do more for teams.

Publishers can solve this problem by working with teams, rather than against them. If publishers truly want players to be paid well, they should share with teams a bigger piece of the pie than they currently gorge on alone.